Notice Your Lien or Kiss it GoodbyeLike many states, Minnesota requires subcontractors and suppliers to send pre-lien notices to owners to perfect mechanic’s lien rights. Failure to comply with the pre-lien notice statute can prove fatal to a lien enforcement action as one masonry supplier recently learned. In Timberwall Land & Masonry Products, Inc., the Minnesota Court of Appeals affirmed the lower court’s summary judgment dismissing a masonry supplier’s lien enforcement action against a homeowner.

In 2018, a homeowner hired a contractor to build a single-family residence. The contractor hired Timberwall to provide materials for a retaining wall at the home. Timberwall did not send a pre-lien notice to the homeowner until 72 days after it started supplying materials to the project. Under Minnesota law, Timberwall should have provided such notice within 45 days.

The homeowner paid the contractor for Timberwall’s work, but the contractor did not pay Timberwall. As a result, Timberwall filed a lien and brought a foreclosure action against the homeowner. The homeowner counterclaimed for slander of title and to quiet title to the property. At trial, the homeowner moved for summary judgment to dismiss the lien enforcement action for failure to comply with Minnesota’s pre-lien notice statute. The trial court agreed with the homeowner and rejected Timberwall’s arguments that (1) it qualified for a good-faith exception to the pre-lien notice requirement and (2) the pre-lien notice was not required because the homeowner acted as its own general contractor.

Timberwall then appealed this partial summary judgment, but the court of appeals also rejected its arguments for an exception to the pre-lien notice requirement. Per the court, Minnesota’s good-faith exception “applies if the lien-claimant first shows that a good-faith effort to comply with the pre-lien notice requirements was made, and the owner or another lien claimant fails to establish damages based on failure to comply.” Because Timberwall did not provide evidence that it made any attempt to serve the pre-lien notice within the 45-day statutory period, it could show no good-faith effort at compliance, so the exception was not applicable.

As in some other states, Minnesota law also provides a lien claimant may be exempt from the pre-lien notice requirement if it can show the owner acted as the general contractor on the project. The pre-lien notice statute is intended to protect unsuspecting owners from hidden liens from suppliers and vendors that are unknown and often unascertainable by the owner. But if an owner is acting as a general contractor for the project those concerns are moot, and in certain circumstances, a supplier may be forgiven for not sending the pre-lien notice.

Timberwall relied on the building permit being issued to the homeowner as a basis for classifying the homeowner as a general contractor. The court of appeals disagreed. The permit only listed the homeowner as a point of contact and not as the general contractor for the residence. There was no evidence the homeowner had any experience acting as a contractor or supervising a building project. Per the court, recognizing the homeowner as a general contractor “would be inconsistent with the purpose of the pre-lien notice.” The court, therefore, denied the appeal, and the parties returned to trial for resolution of the homeowner’s counterclaims.

Lessons from This Decision

Lien statutes are generally strictly construed, so compliance with notice, form, filing, and other requirements is critical. The Minnesota case shows what can happen to subcontractors and suppliers who fail to comply with statutory requirements. Timberwall lost its claim against the owner and probably cannot recover from an insolvent contractor. Moreover, Timberwall likely incurred substantial legal expense to get to this poor outcome. Now it faces further liability from the homeowner’s slander of title counterclaim.

Timberwall appears to have compounded the consequences of its non-compliance by pursuing a meritless lawsuit. It may have been better off writing off the loss before filing the defective lien and accompanying enforcement action. The result in this case underscores the importance of diligent contract administration prior to and during project execution and careful litigation risk assessment once a default or breach occurs under a contract. If you have any questions about this case or lien laws in general, please do not hesitate to contact David Pugh or Aman Kahlon.

Bradley’s construction practice group is proud to announce that it ranked No. 3 on Construction Executive’s list of “The Top 50 Construction Law Firms” for 2020. This is the second consecutive year for Bradley to be ranked in the top five of Construction Executive’s list.

Bradley’s Construction Practice Group has handled every aspect of large-scale construction projects across the country and around the world. Our broad experience comes from our hands on approach to managing both the business and legal challenges our clients face every day. We understand the sophisticated dynamics of the construction industry at home and abroad, and we deliver smart, real-world solutions to our clients.

Our construction lawyers travel extensively to advise clients on projects in the United States, Canada, and Mexico, as well as more than 60 countries across Europe, Asia, Africa, Australia, the Middle East, the Caribbean, and South America. We recognize that the nature of our practice demands spending time onsite at projects, with our lawyers engaging with clients face-to-face on matters as they develop.

We encourage you to reach out to a member our of Construction Practice Group to learn how we can help you and your business.

David K. Taylor, Bradley Arant Boult Cummings, Nashville, TN
dtaylor@bradley.com

615-252-2396

Lawyer’s Advocacy in Arbitrations: No. 4 of the Top 10 Horrible, Terrible, No Good Mistakes Lawyers MakeThis post is a continuation of the Top 10 most horrible, terrible, no good, “bang your head against the door” mistakes that I have seen lawyers make before, during, and after arbitrations in which I served as the arbitrator. As stated in the previous posts, there are pros and cons to binding arbitration versus trial in a court that go beyond a series of blog posts. In many instances, representing a party in an arbitration requires more due diligence and work than a trial. Great “arbitration” lawyering is essential, but many times does not happen.

No. 4: Not understanding Pre-Arbitration Discovery Rights… and Limitations

After going through arbitrator selection and the initial administrative hearing, you not only have an arbitrator, but a scheduling order and a hearing date. Typically, in court, there would then be the start of a tedious and expensive pre-hearing “discovery” process. The mistake: not knowing your arbitration pre-discovery rights and limitations and not having a discovery “plan” in place that takes into consideration these limitations. Recall arbitration is a matter of contract. Does the arbitration clause address pre-arbitration discovery? Typically, a clause will incorporate by reference the rules of the group that will be administering the arbitration, such as the American Arbitration Association (AAA). What do these rules provide, if anything, on pre-hearing discovery? Recall my previous post discussion about effective drafting of arbitration clauses. The lawyer drafting the clause may have referenced some rules that may call for full bore discovery, when the pitch to the client to agree to arbitration was that discovery would be limited. The AAA also has separate rules for complex cases. You have to know what discovery you can and cannot obtain according to the clause and the rules, and be prepared to negotiate with opposing counsel if you cannot get what you need.

Party document exchange is always allowed, and it can be as simple as a letter with a list. It’s not necessary to send a formal “Request for Documents.” I still have arbitrations when counsel try to send interrogatories or requests for admissions. Again, absent a clause or agreement with counsel, the “rules of civil procedure” do not apply in arbitrations. The arbitrator does have the power to entertain motions related to party discovery, such as motions to compel. Entertaining and awarding sanctions is another matter, since again the rules of civil procedure, where judges are given options, do not apply. In these days of e-discovery, especially when there may be reams of documents and emails (especially in construction cases), it makes sense to try to work with opposing counsel on some kind of e-discovery protocol, such as search terms. Any reasonable arbitrator will expect and demand this sort of cooperation.

Pre-hearing depositions are always a tricky subject. Absent a clause, or what the rules provide, typically a party does NOT have a right to take any pre-hearing depositions. This drives some lawyers who do not have arbitration experience crazy. The arbitrator also does not have the right to “order” depositions (there can be exceptions for out-of-state witnesses). There can be an “agreement” with counsel for a full blown, unlimited depositions or just a few. But be forewarned: Many arbitrators who feel strongly about controlling legal costs (one hallmark of arbitration), may push back on “agreements” for extensive discovery. There have been arbitrations where the arbitrator believes the lawyers are out of control and sets up conference calls insisting that the clients participate, along with all counsel, to discuss why such depositions are necessary. How the arbitrator thinks about depositions is key when reviewing arbitrator lists. This is also a topic that prior to the initial scheduling conference counsel should have discussed, and certainly with the arbitrator in that conference where a scheduling order is being fashioned.

What about pre-hearing third-party discovery? The short answer is, unlike “court,” there is no “right” to such discovery. This is a huge factor in agreeing to arbitration in the first place. If there is a dispute arising out of the contract and your client will be the one who will need to have third-party discovery to prevail, that discovery may not happen. This post isn’t long enough to go through all of the case law (federal circuit courts differ on the enforceability of third-party, pre-hearing arbitrator subpoenas) and articles (just Google) on this topic. It is also important to know that unlike judges, arbitrators do not have the power to enforce a pre-hearing, third-party subpoena. The remedy for that party is to “go to court” to try to enforce the subpoena. Best advice: Have the arbitrator issue third-party discovery subpoenas early, well in advance of the hearing date. Since these third parties may simply ignore the subpoena, obtaining a continuance of a hearing because of your own issues with third-party discovery may not happen.

The primary learning points: (a) Know what your arbitration clause and rules allow for pre-hearing discovery; (b) have a plan for discovery in advance of the initial scheduling conference; (c) try to reach agreement with counsel if at all possible; and (d) use the arbitrator to manage the process to favor your client. Failing to do any of this will seriously hurt your chances of success at a hearing.

Read numbers 1, 2 and 3 on the list.